High Entry Cost and “Retainability” of Musical Organizations

Kid Rock performs with the Detroit Symphony Orchestra. The Sold-Out show raised over a million dollars for the DSO. Or maybe some of those funds are going to relocate the Kid Rock Badass Beer?

In my previous post I outlined some aspects of various performance based industries (Classical Music, Sports, Pop Music) and how audiences numbers can matter little to the largest organizations within them (Orchestras, Sports Teams, Pop Superstars).  I highlighted what i was referring to as an “infrastructure” which contributes to the lion’s share of revenue (and resources) that are as much, if not more, important to the profitability (and sustainability) of such industries.

Ironically, given his position within the field of cultural economics and the “Cost Disease” named after him, William J. Baumol discusses how industries can become “too big to fail” in almost the opposite way that so-called labor-intensive industries (such as the Performing Arts) are “too big to succeed” due to the Performance Income Gap.

Retainability and High Entry Cost

In “Global Trade and Conflicting National Interests” (2000) Baumol and his co-author former Princeton Mathematician, Ralph E. Gomory, discuss “Retainable” Industries.  A retainable industry is characterized by High Entry Costs which result in difficulties for small-scale entry.  Such industries, “because of [its] high real start-up costs, offers the current established producers a substantial degree of protection from competitive entry, making it easier for them to retain their positions.”  Often, this characteristic is the result of having taken advantage of creating Economies of Scale which Baumol and Bowen (1966) as well as Flanagan (2012) agree orchestras can do to some extent.

But it’s the set of characteristics–the infrastructure I talked about in the previous post–that Baumol and Gomory talk about which has more relevance here.  As they write in Chapter 2 Section 2.3 titled, “High Entry Cost and ‘Retainability’ of an Industry”:

…in many cases small-scale entry is almost impossible.  Automobiles, computers, and television sets are examples.  You cannot hand-make a car from scratch in your garage and compete with the large-scale production of General Motors.

And, quite aside from the necessary scale of production, it may require a long period of operation before the personnel of a new industry entrant acquire the skill and experience to make the product as efficiently as possible as the current leading competitors.  There may be new technology to be mastered, technology that is based on experience not easily learned.  Or success in the product in question may require the availability of nearby ancillary industries that themselves are difficult to establish and that the prospective entrant country may lack.  A distribution network may have to be set up from scratch, knowledge of the marketplace acquired, and so on.  It is not easy to compete when the competition has learned much by years of effort and experience in all these areas.  (Gomory and Baumol 2000: 16-17)

The statements, “Or success in the product in question may require the availability of nearby ancillary industries that themselves are difficult to establish and that the prospective entrant country may lack” and “A distribution network may have to be set up from scratch” are telling since the biggest difference between the Classical Music industry and the Sports and Pop Music industries is precisely because of the mass media industries and distribution networks (e.g. Broadcast Media, Record Labels) were either quickly adopted or integrally a part of the initial growth of the latter.

In some cases, such as with the Sports Broadcast Act of 1961 or the creation of the RIAA, these industries have also been able to take advantage of or influence legislation to help create an environment within which they can be profitable.

What about Classical Music

While it may seem as if the Classical Music Industry doesn’t have the same advantages of the “pop culture” industries, it might be useful to put things into perspective to understand how much of the infrastructure of the US still contributes to the retainability of the field.  We’ll do this with a thought experiment.

Imagine starting a new Orchestra.  This obviously musicians, of which there are quite an abundance given how many musicians are trained in US music schools.  Same issue with conductors.  Concert venues exist in abundance, as do (arguably decreasing) audiences.  But what if this new Orchestra is to be a traditional Chinese Orchestra?

While it may be easy find enough violins to fill out the violin section within a reasonable radius of the home base of a European Orchestra, how likely will there be enough highly trained erhu players to fill the erhu section of the Chinese Orchestra?  What about a conductor that is both familiar with the Chinese instruments typically found in this kind of Orchestra as well as the standard repertoire?  Few US based music schools offer professional training in Chinese instruments and conducting the repertoire of Traditional Chinese Orchestras.  What about an audience for such an ensemble?

There are, in fact, a number of traditional Chinese Orchestras scattered throughout the US.  A significant proportion of them exist in the Bay Area for the obvious reasons that musicians and audiences are much more likely to be found in this region which sports the largest population of Chinese-Americans in the US.  However, there currently aren’t any full-time professional traditional Chinese Orchestras in the US while there are obviously several full-time professional European-styled Orchestras.

I think this simple thought experiment shows the level of retainability the Classical Music Industry still has relative to other musical styles and genres.

Does the Cost Disease actually exist?

Given how important the infrastructure–or maybe more simply, the environment–is for the retainability of Industries, what exactly does this mean for the Cost Disease?  While two of my previous posts discusses the cost disease as it pertains to the Sports Industry and the Pop Music Industry, the idea that any of these (or the Classical Music Industry too for that matter) are simply labor-intensive industries as opposed to capital-intensive industries doesn’t seem nearly as tenable as most ‘doom and gloom’ critics of Classical Music seem to think.

Tyler Cowen, in fact, doesn’t believe in the Cost Disease at all (Cowen 1996) and argues that there has been plenty of productivity increases which are integral to the Performing Arts much as the infrastructural aspects  are integral to retainable industries.  As the abstract to Cowen and Grier’s (1996) paper states:

We consider the Baumol-Bowen cost-disease argument from the perspective of an artist’s occupational choice. Both theory and evidence suggest that the incentives to create art do not diminish and probably increase in a growing market economy. First, countervailing factors may check or limit the operation of the cost-disease. Second, artists can increase their productivity by generating new ideas. New ideas provide the base for all productivity improvements, whether in the arts or in industry. Third, the arts are not necessarily labor-intensive, as cost-disease proponents allege. Fourth, the available statistical evidence implies that economic growth has favorable effects on artistic production.

Though I question the sustainability of Sports and Pop Music (as well as in my most recent post and at Joe Patti’s blog) it’s easy to see how both these industries have managed the Cost Disease, or at least forestalled any long term structural deficits which seem more apparent in Performing Arts Organizations.

Retainability isn’t Absolute

Gomory and Baumol state that no industry is perfectly retainable1 and that protection is never absolute.  They give the classic example of the Japanese auto industry:

The modern world has its examples in which, over time, new entrants have appeared in industries which high start-up costs.  The emergence of the Japanese auto industry and its impact on the U.S. automobile market comes immediately to mind.  But this is an illuminating case.  The Japanese auto industry was able to start on a small scale in the protected Japanese home market.  It had grown into a formidable and large-scale industry by the time its products started to appear in the United States. (Gomory and Baumol 2000: 17)

While the above example is international in scope, it’s not very different than how domestic entertainment markets have been dominated by legislative forms of protection.  For example, sports leagues are either exempt from anti-trust laws or operate as if they are which obviously shields them from competition.  The extension of the term of copyright by the Sonny Bono Act (also referred to as the Mickey Mouse Protection Act) has allowed musicians or media corporations to continue to earn revenue many more years after the death of the original author.

The recent modification of the Blackout Rule in Sports and the current digital file-sharing climate shows how fans are starting to kick-back against the Sports and Pop Music Industry.  Public kick-back also includes increasing opposition to the public contribution to Sports Stadiums which are a drain on local resources and never seem to have the economic impact that proponents claim when lobbying for their construction.

These are just some examples of how the infrastructure–which help determine the retainability of an industry–are slowly eroding for all forms of entertainment.  A rapidly changing age and racial demographic2 isn’t necessarily going to help since so much of the infrastructure of broadcasting relies on the “Savior Demographic” in the 18-49 age bracket.

How to become a retainable industry

The question is, then, how does a musical group become a retainable entity?  If any of the above I’ve stated is anywhere near correct, then a healthy understanding of the environment–both the audiences as well as the support infrastructures–would be crucial.  No amount of creative vision can bring into being ex nihilo.

This is pretty standard advice for any creative endeavor–you need to understand where you are, and where you want to go before you can take steps to fill in the gaps toward the creative vision.

Understanding that audiences, for any significantly large organization, is never going to contribute a significant enough proportion of revenue simply means there is a need to find other revenue sources.  While a donor base isn’t always  the most reliably stable source of revenue, as I’ve intimated above, neither are the revenue sources utilizing the infrastructures discussed above.

Some of that infrastructure includes laws (e.g. Sports Broadcasting Act); other institutions (RIAA); different audience segments (as opposed to the preferred 18-49 demographic); and venues.  Understanding how to use these to a music organizations’ benefit will be far more useful than wishful thinking, which is not to say that outside-the-box thinking should never be done.

In the end, we might just have to accept that we could simply be at the tail end of the economic boom which started post WWII when all three of the industries above expanded dramatically as Tyler Cowen seems to suggest.  The boom might have created industry economic bubbles which are all near busting.  Alternatively we might very well be on the edge of another significant paradigm shift as we continue to inch towards an even more ‘globalized’ world

_______________________
NOTES:

1. My wife, as we were having a discussion about this blog post this morning, mentioned I should look into the First Mover Advantage Myth which deals with the idea that the first to a market segment always corners that market segment. One of the advantages of being married to a recent MBA graduate and professional reference librarian is having access to ideas in a field in which I was not originally trained!

2. Eric Edberg and I were discussing this in my previous post, and his recent post brings up a host of relevant questions regarding how to draw in this younger audience while maintaining something of the status quo (i.e. High Artistic Standards).

REFERENCES:

Baumol, W. J., W. G. Bowen (1966)  “Performing Arts – The Economic Dilemma”  New York: The Twentieth Century Fund.

Cowen, T. (1996)  “Why I Do Not Believe in the Cost Disease: Comment on Baumol”  Journal of Cultural Economics20(3): 207-214.  doi: 10.1007/s10824-005-7214-1

Cowen, T., and R. Grier (1996)  “Do Artists Suffer from a Cost Disease?”  Rationality and Society8(1): 5-24.  doi: 10.1177/104346396008001001

Flanagan, R. J. (2012)  “The Perilous Life of Symphony Orchestras: Artistics Triumphs and Economic Challenges”  New Haven: Yale University Press.

Gomory, R. E., W. J. Baumol (2000)  “Global Trade and Conflicting National Interests”  Cambridge: The MIT Press.

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